I’m in a crabby mood. Why not spread the joy around? Welcome to today’s deliberately inflammatory column. Here are 13 of my firmly held financial beliefs:
1. You have no clue where stocks and interest rates are headed — and neither does anybody else. Instead of forecasting returns, investors should devote their efforts to cutting investment costs, trimming taxes and managing their portfolio’s risk level.
2. Buying actively managed mutual funds is an act of faith in the face of daunting odds. S&P Dow Jones Indices, part of McGraw Hill Financial, analyzed the performance of U.S. stock funds in 13 categories. Depending on the category, just 14 percent to 39 percent of funds managed to beat their benchmark index over the five years through year-end 2013.
3. It’s a huge mistake to compensate a financial adviser through commissions. Yes, it can be cheaper than paying a percentage of assets. But paying commissions means the adviser’s recommendations will always be suspect, because he or she has an incentive to get you to trade more and buy higher-commission products.
That brings me to a pet peeve: Advisers wouldn’t be nearly so enthusiastic about variable annuities, equity-indexed annuities and cash-value life insurance if the commissions weren’t so high.
4. Insurance is a waste of money — if you’re lucky. After all, if you collect on a policy, it means somebody has died, the house has burned down or some other disaster has struck. What if you collect on a policy and yet you could have afforded to pay the loss out of pocket? That’s a sign you’re over-insured and you should probably scale back some of your policies and perhaps drop them entirely.
5. You are highly unlikely to make money from your home’s price appreciation once you figure in inflation, homeowners insurance, maintenance and property taxes. What if you have a mortgage? The loan may leverage any home-price gains — but the interest costs will likely offset the benefits.
6. Paying down a mortgage is a great low-risk investment. It may not give you the highest possible return. But the interest saved is probably greater than the yield you could earn by buying bonds and the result can be substantial financial freedom. Everybody should strive to be mortgage-free by retirement.
7. Carrying a credit-card balance is an act of financial foolishness. Except in a dire emergency, you should never put a purchase on a credit card unless you’re confident you can pay off the balance in full.
8. Don’t budget. It’s a tedious exercise favored by nerdy individuals. Instead, make sure you save enough every month. Do that, and there is no need to budget.
9. Saving diligently is the way everyday Americans get rich. Don’t have a traditional employer pension plan? To retire in moderate comfort, you will likely need to save at least 10 percent of your income every year for at least 30 years.
10. Not saving that 10 percent? You probably shouldn’t be buying new cars, purchasing a second home or paying for your children’s college education.
11. You should put at least enough in your employer’s retirement plan to earn the full matching contribution — even if there is a risk you’ll cash out the account.
Consider an extreme example: Let’s say you’re in the 25 percent tax bracket and your employer matches your contributions at 50 cents on the dollar. If you put $1,000 in the plan, your $1,000 would become $1,500, thanks to the match — but your paycheck would shrink by just $750, thanks to the initial tax savings. If you then lost your job, cashed out the $1,500, paid 25 percent in taxes and 10 percent in tax penalties, you would still be left with $975, or $225 more than your $750 cost.
12. If you’re the family’s main breadwinner, you should probably delay claiming Social Security until age 66 and perhaps age 70, so you get a larger monthly check. For retirees, the big financial risk isn’t dying early in retirement, with scant dollars collected from Social Security. Rather, the big financial risk is living longer than you planned for—and a larger Social Security check helps protect against that risk.
13. Think more money will make you happier? Consider this: Most folks grow wealthier over time, which means today you’re likely richer than you’ve ever been. But you can probably think back to a time when you were at least as happy as you are today—and maybe happier.
Bring it on. You can reach me here: [email protected]
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones & Co. Inc. All rights reserved.